The surprising deal will put Marvell in direct competition against the likes of Broadcom, Intel, Lucent, and other major local-area networking chip suppliers.

With the acquisition of San Jose-based Galileo, Marvell will become one of the world's leading suppliers of switch-chip controllers for Layer 2 and 3 applications in Ethernet- and Fast Ethernet-based networks.

One of the pioneers in the merchant switch-chip business, Galileo sells a line of both low- and high-end switching ICs to Cisco Systems, Hewlett-Packard, and other major OEMs, analysts said.

Galileo's products are complementary to those from high-flying Marvell. The Sunnyvale, Calif.-based company makes read-channel ICs as well as transceivers for use in Fast Ethernet-based networks. These transceivers are critical receive/transmit parts that work in conjunction with switch-chip products from Galileo and other suppliers.

In addition to Marvell, Broadcom, Intel, and Lucent also sell both switching chips and transceivers for local- and wide-area networks.

"This highly complementary merger combines two best-of-breed technology companies: a leader in physical layer communications silicon with a leader in higher layer packet processing and switching silicon," said Sehat Sutardja, president and chief executive of Marvell.

"This combination brings together Marvell's industry-leading gigabit Ethernet Alaska transceiver technology with Galileo's Galnet family of advanced Layer 2/3/4/5 switched Ethernet processors," he added. "We believe the combined company will be the only supplier currently shipping both gigabit transceivers and switch ICs."

Upon completion of the merger, Avigdor Willenz, chief executive of Galileo, will become executive vice president and general manager of the Galileo Technology Group, a subsidiary of Marvell. Willenz will report directly to Sutardja and join Marvell's board. Galileo will continue operations in both Israel and San Jose.

Under the terms of the merger agreement, Marvell will issue 0.674 shares of its common stock for each common share of Galileo's stock. As a result, Galileo shareholders and option holders will receive approximately 32.9 million shares of Marvell stock, or 25% of the diluted ownership in the combined company in exchange for all the shares and options of Galileo.

The deal is expected to be completed in the first quarter of next year.